Limited Liability Companies

The Complete Guide to

Limited Liability Companies

Release No. 16

In-Depth Reviews of New LLC Acts of California and Florida

-New State-By-State Analysis of Charging Orders

-Issuance of Additional Membership Interests

-Transacting Business Outside the State

of the Operating Agreement

-Up-to-Date LLC Statutes for Every State

-New & Updated Case Law

-Updated LLC Forms for Each Jurisdiction

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THE COMPLETE GUIDE TO

LIMITED LIABILITY COMPANIES

By WAYNE A. HAGENDORF

PART ONE—CHARACTERISTICS OF A LIMITED LIABILITY COMPANY

CHAPTER ONE

WHAT IS A LIMITED LIABILITY COMPANY? I. DESCRIPTION

II. HISTORY OF THE LIMITED LIABILITY COMPANY III. COMPARISON TO OTHER BUSINESS ENTITIES ENDNOTES

CHAPTER ONE-A

SOLE PROPRIETORSHIP VERSUS LIMITED LIABILITY COMPANY I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN SOLE PROPRIETORSHIPS AND LLCs III. CONVERSION FROM A SOLE PROPRIETORSHIP TO AN LLC IV. LIMITED LIABILITY COMPANY ADVANTAGES

V. SOLE PROPRIETORSHIP ADVANTAGES

CHAPTER TWO

PARTNERSHIP VERSUS LIMITED LIABILITY COMPANY I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN PARTNERSHIPS AND LLCs III. CONVERSION FROM A PARTNERSHIP TO AN LLC IV. LIMITED LIABILITY COMPANY ADVANTAGES V. PARTNERSHIP ADVANTAGES

ENDNOTES

CHAPTER THREE

LIMITED LIABILITY PARTNERSHIP VERSUS LIMITED LIABILITY COMPANY

I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN LLPs AND LLCs III. CONVERSION FROM AN LLP TO AN LLC IV. LIMITED LIABILITY COMPANY ADVANTAGES V. LIMITED LIABILITY PARTNERSHIP ADVANTAGES ENDNOTES

CHAPTER FOUR

LIMITED PARTNERSHIP VERSUS LIMITED LIABILITY COMPANY I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES III. CONVERSION FROM A LIMITED PARTNERSHIP TO A LIMITED LIABILITY COMPANY IV. LIMITED LIABILITY COMPANY ADVANTAGES

V. LIMITED PARTNERSHIP ADVANTAGES ENDNOTES

CHAPTER FIVE

CORPORATION VERSUS LIMITED LIABILITY COMPANY I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN CORPORATIONS AND LIMITED LIABILITY COMPANIES III. CONVERSION FROM A CORPORATION TO A LIMITED LIABILITY COMPANY IV. LIMITED LIABILITY COMPANY ADVANTAGES

V. CORPORATION ADVANTAGES ENDNOTES

CHAPTER SIX

S CORPORATION VERSUS LIMITED LIABILITY COMPANY I. COMMON CHARACTERISTICS

II. DIFFERENCES BETWEEN AN S CORPORATION AND A LIMITED LIABILITY COMPANY III. CONVERSION FROM AN S CORPORATION TO A LIMITED LIABILITY COMPANY

IV. LIMITED LIABILITY COMPANY ADVANTAGES V. S CORPORATION ADVANTAGES

ENDNOTES

PART TWO—FORMATION OF A LIMITED LIABILITY COMPANY

CHAPTER SEVEN

ESTABLISHING A LIMITED LIABILITY COMPANY I. CREATION BY STATE STATUTE

II. ELEMENTS OF FORMATION III. PROCEDURE

IV. MEMBERSHIP

V. SUMMARY CHECKLIST FOR ESTABLISHING A LIMITED LIABILITY COMPANY ENDNOTES

CHAPTER EIGHT

FLOW-THROUGH TAX TREATMENT I. IN GENERAL

II. FEDERAL TAX TREATMENT III. STATE TAX TREATMENT

CHAPTER NINE

CAPITAL CONTRIBUTIONS I. CONTRIBUTIONS TO THE LLC

II. LLC DEBT

III. SECURITY ISSUES IV. SUMMARY

ENDNOTES

PART THREE—OPERATION OF A LIMITED LIABILITY COMPANY

CHAPTER TEN

THE LIMITED LIABILITY COMPANY ENTITY I. THE ENTITY CONCEPT

II. MEMBERS’ INTERESTS

III. TRANSFER OF A MEMBER’S INTEREST ENDNOTES

CHAPTER ELEVEN

THE OPERATING AGREEMENT I. INTRODUCTION

II. FORCE AND EFFECT

III. CONTENTS OF THE OPERATING AGREEMENT

IV. AMENDING, ALTERING, OR REPEALING THE OPERATING AGREEMENT V. SUMMARY CHECKLIST FOR OPERATING AGREEMENT

ENDNOTES

CHAPTER TWELVE

GOVERNANCE OF THE LIMITED LIABILITY COMPANY I. INTRODUCTION

II. MANAGEMENT BY MEMBERS III. MANAGEMENT BY MANAGERS IV. FINANCES

V. SUMMARY ENDNOTES

CHAPTER THIRTEEN

LIABILITY ISSUES I. LIABILITIES OF THE LIMITED LIABILITY COMPANY II. LIABILITIES OF MEMBERS

III. LIABILITIES OF MANAGERS IV. INDEMNIFICATION

V. SUMMARY ENDNOTES

PART FOUR—TERMINATION OF A LIMITED LIABILITY COMPANY

CHAPTER FOURTEEN

METHODS OF TERMINATION I. INTRODUCTION

II. VOLUNTARY TERMINATION III. INVOLUNTARY TERMINATION

IV. JUDICIAL OR ADMINISTRATIVE TERMINATION V. MERGERS AND CONSOLIDATIONS

VI. SUMMARY ENDNOTES

CHAPTER FIFTEEN

CONSEQUENCES OF TERMINATION I. EFFECT OF TERMINATION ON LLC BUSINESS

II. DISTRIBUTION OF ASSETS

III. PROCEDURE TO TERMINATE THE LLC IV. REVOCATION OF DISSOLUTION

V. SUMMARY ENDNOTES

PART FIVE—TAXATION OF A LIMITED LIABILITY COMPANY

CHAPTER SIXTEEN

INTRODUCTION TO THE TAXATION AND FORMATION OF THE LIMITED LIABILITY COMPANY

I. INTRODUCTION TO THE LLC II. FORMATION OF THE LLC

III. BASIS OF LLC INTEREST TO MEMBER

IV. BASIS OF PROPERTY CONTRIBUTED BY A MEMBER TO AN LLC V. CONVERSION OF EXISTING BUSINESS TO AN LLC

VI. SUMMARY ENDNOTES

CHAPTER SEVENTEEN

THE CHANGES MADE BY THE JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003 AND THE 2010 AND 2012 TAX RELIEF ACTS EXTENDING MOST OF THE BUSH TAX CUTS I. INTERNAL REVENUE CODE § 702

II. REDUCTION OF INCOME TAX RATES

III. INCREASE OF THE ALTERNATIVE MINIMUM TAX EXEMPTION IV. LONG TERM CAPITAL GAINS TAX REDUCED

V. TAX ON QUALIFIED DIVIDENDS CONSIDERED NET CAPITAL GAINS AND REDUCED TO 15% VI. CONFERENCE REPORT FOR CAPITAL GAINS AND DIVIDEND PROVISIONS

CHAPTER EIGHTEEN

TAXATION OF THE LIMITED LIABILITY COMPANY (PARTNERSHIP CLASSIFICATION) OPERATIONS I. THE ENTITY CONCEPT

II. THE LLC TAX YEAR

III. THE COMPUTATION OF LLC INCOME IV. TAX ELECTIONS

V. THE LLC MEMBER’S DISTRIBUTIVE SHARE VI. FAMILY LLCs

VII. LOSSES

VIII. BASIS OF A MEMBER’S INTEREST IX. SUMMARY

ENDNOTES

CHAPTER NINETEEN

DISTRIBUTIONS FROM AND TRANSFERS OF AN INTEREST IN AN LLC WHICH POSSESSES UNREALIZED RECEIVABLES AND INVENTORY I. INTRODUCTION

II. THE COLLAPSIBLE LLC

III. THE GENERAL RULES COVERING UNREALIZED RECEIVABLES AND INVENTORY (SECTION 751) IV. UNREALIZED RECEIVABLES

V. INVENTORY

VI. DETERMINATION OF GAIN OR LOSS ON UNREALIZED RECEIVABLES AND INVENTORY VII. NOTIFICATION REQUIREMENTS FOR SELLING MEMBER AND LLC

VIII. SUMMARY ENDNOTES

CHAPTER TWENTY

DISTRIBUTIONS FROM AN LLC I. INTRODUCTION

II. CURRENT DISTRIBUTIONS OF CASH AND MARKETABLE SECURITIES NOT IN EXCESS OF BASIS III. CURRENT DISTRIBUTIONS OF CASH AND MARKETABLE SECURITIES IN EXCESS OF

MEMBER’S BASIS

IV. CURRENT DISTRIBUTIONS OF PROPERTY OTHER THAN CASH AND MARKETABLE SECURITIES V. THE MEMBER’S TREATMENT OF DISTRIBUTIONS IN LIQUIDATION OF A MEMBER’S INTEREST VI. TREATMENT OF DISTRIBUTIONS IN LIQUIDATION OF A MEMBER’S INTEREST

VII. CHARACTERIZATION OF PAYMENTS TO A MEMBER VIII. DISTRIBUTION IN COMPLETE LIQUIDATION OF THE LLC IX. SUMMARY

CHAPTER TWENTY-ONE

PURCHASE OR SALE OF AN LLC MEMBER’S INTEREST (PARTNERSHIP CLASSIFICATION)

I. TAX EFFECTS ON SELLER II. TAX EFFECTS ON PURCHASER

III. TAX EFFECTS ON REMAINING MEMBERS IV. SUMMARY

ENDNOTES

CHAPTER TWENTY-TWO

UNIFIED PARTNERSHIP (LLC) AUDIT PROCEDURES I. TEFRA

II. LLCs SUBJECT TO THE UNIFIED AUDIT PROCEDURES III. THE CONSISTENCY REQUIREMENT

IV. THE TAX MATTERS PARTNER (TMP) V. PARTNERSHIP (LLC) ITEMS

VI. THE INITIAL AUDIT PROCEDURE VII. THE AUDIT

VIII. THE APPEALS CONFERENCE

IX. THE FINAL PARTNERSHIP ADMINISTRATIVE ADJUSTMENT (FPAA) X. SUMMARY

ENDNOTES

APPENDICES

APPENDIX I—AGREEMENTS

APPENDIX II—MEMBER LIABILITY TO THIRD PARTIES STATE-BY-STATE ANALYSIS

APPENDIX III—CHARGING ORDERS

STATE-BY-STATE ANALYSIS APPENDIX IV—CALIFORNIA’S NEW

LIMITED LIABILITY COMPANY STATUTE APPENDIX V—FLORIDA’S NEW LIMITED LIABILITY

COMPANY STATUTE APPENDIX VI—STATE STATUTES

APPENDIX VII—SELECTED PROVISIONS OF THE INTERNAL REVENUE CODE AND REGULATIONS

APPENDIX VIII—TABLE OF CASES